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Mortgage Rates (12/13/2010 - The Week Ahead)

December 13th, 2010 9:54 PM by Lehel S.

This week is fairly busy in terms of the number of economic releases scheduled for release with six on the agenda in addition to the last Federal Open Market Committee (FOMC) meeting of the year. Three of the five economic reports are considered to be of high importance, so the data should have a heavy influence on the markets and mortgage rates this week. 





There is no relevant economic news due out tomorrow. This means we can expect the stock markets to drive bond trading and mortgage rates again. If the major stock indexes open the week with gains tomorrow morning, bonds may move lower, pushing mortgage rates higher. But a weak open in stocks could lead to slightly lower mortgage rates tomorrow. Friday’s bond market went into closing on a negative trend, so hopefully the weekend will prevent a carryover into tomorrow’s trading.

Tuesday has two of the more important reports of the week with November's Retail Sale s report and Producer Price Index (PPI). The Retail Sales report tracks retail level sales and is very important to the financial markets because it measures consumer spending. Since consumer spending makes up two-thirds of the U.S. economy, any related data is watched closely. Current forecasts call for it to show a 0.5% increase in sales from October’s levels. If it reveals weaker than expected sales, the bond market should thrive and mortgage rates should fall as a result. A stronger than expected reading would indicate economic growth, leading to stock market gains and higher mortgage rates Tuesday. 

November’s Producer Price Index (PPI) will also be posted early Tuesday morning. It measures inflationary pressures at the producer level of the economy. There are two portions of the index that are used- the overall reading and the core data reading. The core data is the more important of the two because it excludes more volatile food and energy pric es. If Tuesday's release reveals stronger than expected readings, indicating that inflationary pressures are rising, the bond market will probably react negatively and drive mortgage rates higher. If we see in-line or weaker than expected numbers, the bond market should fair well and mortgage rates should fall. Current forecasts are showing a 0.5% increase in the overall index and a 0.2% rise in the core data.

The last FOMC meeting of the year will be held Tuesday, adjourning at 2:15 PM ET. There is not much debate about what the Fed will do at this meeting with no chance of them raising key short-term interest rates. Therefore, the post meeting statement will likely be the sole source of a market reaction. This statement has the potential to have a significant influence on the markets and mortgage rates as investors look for any indication of what and when the Fed may do next. We are hoping that Mr. Bernanke and friends will take the opportunity to remind the markets that the economy still has significant hurdles to overcome and that inflation is still not a concern. A properly worded post-meeting statement could cause stock selling and an improvement in bond prices, leading to improvements to mortgage rates Tuesday afternoon.





The week’s most important economic data comes Wednesday morning when November’s Consumer Price Index (CPI) is posted. It is similar to Tuesday’s Producer Price Index, except it tracks inflationary pressures at the more important consumer level of the economy. Current forecasts call for an increase of 0.2% in the overall index and a 0.1% rise in the core data reading. The core data is watched more closely because it excludes more volatile food and energy prices, giving a more stabile reading for analysts to consider. This data is one of the most watched inflation indexes, which is extremely important to long-term securities such as mortgage related bonds. Ri sing inflation erodes the value of a bond’s future fixed interest payments, making them less appealing to investors. That translates into falling bond prices and rising mortgage rates.

November’s Industrial Production data is also scheduled to be posted Wednesday morning, but a little later than the CPI. This report gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities. Analysts are expecting it to show a 0.3% increase in output. A smaller than expected rise would be good news for bonds, while a stronger than expected reading may result in slightly higher mortgage pricing. However, the CPI release is more important to the markets than this data is.





Thursday’s only monthly data is November's Housing Starts, but it is the week’s least important data. I don’t see it causing much movement in mortgage rates unless it shows a huge variance from exp ectations. It is expected to show a sizable increase in starts of new homes, indicating housing sector strength. Generally speaking, this would be bad news for bonds and mortgage pricing, but unless there is a significant surprise it will likely have little impact on Thursday’s mortgage rates.

The last piece of economic news will be posted late Friday morning when the Conference Board releases their Leading Economic Indicators (LEI) for the month of November. This 10:00 AM release attempts to measure or predict economic activity over the next three to six months. It is expected to show a sizable increase in activity, meaning that it predicts an expanding economy over the next several months. This probably will not have much of an impact on bond prices or affect mortgage rates unless it exceeds current forecasts of a 1.2% increase from October’s reading. The lower the reading, the better the news for bonds. If it shows a smaller increase, the bond mar ket may move slightly higher, leading to a minor improvement in rates.





Overall, expect to see yet another volatile week in the financial markets and mortgage pricing. The most important day of the week is either Tuesday or Wednesday due to the reports being posted those days and the FOMC meeting scheduled. Please maintain contact with your mortgage professional if you have not locked an interest rate yet because we may see sizable changes to mortgage pricing more than one day this week.

If I were considering financing/refinancing a home, I would.... Lock if my closing was taking place within 7 days... Float if my closing was taking place between 8 and 20 days... Float if my closing was taking place between 21 and 60 days... Float if my closing was taking place over 60 days from now... This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all /any other borrowers. 
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Posted by Lehel S. on December 13th, 2010 9:54 PM

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